Aluminum producer Alcoa Inc. (AA) kicked off the 2008 fourth quarter earnings season with a wider-than-expected loss, sending revenue plunging as demand waned and prices fell. Though analysts expected the loss — the company’s first in six years — it was larger than expected and the shares, which were off over six percent in trading on Monday before the announcement dropped an additional seven percent on Tuesday morning.
Historic Decline in Prices
The loss of $1.19 billion was attributed to “an historic decline in metal prices,” weak end markets and almost $1 billion in restructuring, impairment and special charges to curtail production, reduce costs and streamline its portfolio, according to the release. Absent the one-time charges which totaled $920 million, or $1.15 per share, Alcoa’s loss would have been 34 cents per share.
Analysts were expecting the loss to be 10 cents per share for the quarter, according to a survey by Thomson Reuters. Revenue fell to $5.7 billion from $7.0 billion in last year’s Q4 but was $700 million higher than expected helping mitigate what likely would have been a disastrous day for the shares.
President and CEO Klaus Kleinfeld said that the industry was caught up in a perfect storm. “The price has never before fallen so fast. As demand disappears, inventories are building and prices are decreasing.”
The company said prices fell by 35 percent in the quarter (56 percent from July) as weakness in the auto sector, commercial transportation and building and construction sectors all conspired to make it one lousy quarter. The roster of some of Alcoa’s key customers quickly confirms that it should be a long and difficult road to recovery: General Motors (GM), Ford (F), Boeing (BA) and Airbus.
More Cost Cutting Ahead?
Alcoa announced last week it would slash some 15,000 jobs, close plants, cut aluminum output and cut capital expenditures by 50 percent in a bid to stem the tide. Despite the proactive steps by management, with prices at current levels, further production cuts may be on the horizon. A J.P. Morgan analyst believes that unless the price of aluminum stages a rebound soon the company will have to take decisive action to preserve cash including more meaningful cost reductions and a cut or total elimination of the dividend.
Mr. Kleinfeld said during the conference call that the company would not cut or suspend the dividend, currently at 68 cents per share. The outlook for Alcoa is that conditions will likely get worse before they get better but its liquidity position is still strong and it has minimal debt repayments in 2009. A dividend cut is unlikely for now but worsening conditions could force the company’s hand.
Alcoa is not alone, as worldwide production is being cut, with Moscow-based United Company Rusal trimming output by 4 percent and Aluminum Corp. of China planning cuts of about 18 percent. On the plus side, inventories at the company’s customers and distributors are “very low,” according to Kleinfeld.
